Asian Containerboard Markets An Update on China: The Changes Keep Coming International Containerboard Conference November 2018 Beth Lis Vice President, Asian Paper & Packaging
Beth Lis VP Asian Paper & Packaging Covers Asian graphic and packaging paper markets With RISI more than 20 years Helped develop RISI s Asian models and databases Author/co author of the Asian Pulp & Paper Monitor and Asian Graphic Paper and Paper Packaging Forecasts Oversees and contributes to single and blis@risi.com multi client studies on Asian markets 2
Points of Discussion Is demand in China s containerboard market slowing? How are the latest government policies on recovered paper impacting domestic containerboard mills? How will Chinese mills meet their future fiber needs? How are the changes in China impacting the rest of Asia? 3
Snapshot of 2018 Asian Containerboard Demand Chinese demand is weak Economic growth is decelerating faster than many anticipated Substitution from paper to plastics due to high prices E commerce trying to reduce its packaging footprint Lots of uncertainty on level of decline in 2018 Showing 4% drop could be greater? For the rest of Asia, demand growth projected to be steady at 3 4% in 2018 4
China s Economy Is Decelerating in 2018 12% 10% 8% 6% 4% 2% Retail Sales (Y o Y) Fixed Asset Investment (YTD) Industrial Production (Y o Y) Average NBS & Caixin PMI 52.0 51.5 51.0 50.5 50.0 Economic growth is slowing faster than many anticipated Government policies to address high debt levels having an effect Trade war with USA Retail sales data showing slower growth PMIs moving lower 0% 49.5 Jan 2017 Mar 2017 May 2017 Jul 2017 Sep 2017 Nov 2017 Jan 2018 Mar 2018 May 2018 Jul 2018 5
Containerboard Prices in East China Soared in 2017, But Lost Momentum in 2018 Renminbi per Tonne 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Domestic OCC Kraft Top Price US OCC CM Price 0 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 2017 driven by tighter markets and costs Solid demand growth Supply disruptions due to government RCP and environmental policies 2018 held back by Weak demand Already high prices Better import planning 6
China s Linerboard Imports Keep Rising in 2018 250 200 150 100 50 Asia Other North America Oceania Western Europe 0 Jun 2018 Jul 2018 Aug 2018 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018 Apr 2018 May 2018 Thousand Tonnes April August 2018 data are RISI estimates based on source country data. 7
Chinese Imports of Corrugated Medium Are Strong 140 120 100 80 60 40 20 Asia North America Oceania Western Europe Other 0 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018 Apr 2018 May 2018 Jun 2018 Jul 2018 Aug 2018 Thousand Tonnes April August 2018 data are RISI estimates based on source country data. 8
China s Market Has Shifted Gears in 2018 Year to Year Change 5 4 3 2 95% 90% 85% Demand growth turns negative at estimated 4% Plenty of capacity but output constrained by fiber Million Tonnes 1 0 1 2 3 4 2007 Net Imports Demand 2008 2009 2010 Production Operating Rate 2011 2012 2013 2014 2015 2016 2017 2018 80% 75% 70% 65% Mills taking downtime for fiber and market reasons Another increase in net imports Operating rates plunge Uncertainty over capacity growth 9
Government RCP Policies Are Affecting the Way Chinese Companies Are Operating Constrained fiber supplies driving up trade and reducing production RCP imports expected to total 15 million tonnes in 2018, down from 25.7 million tonnes in 2017 Potential ban on all RCP imports in near future Current scenario assumes 10 million tonnes in 2019, 5 million tonnes in 2020 and no imports in 2021 Adapt thru combination of more local collection, less production, more imports, less demand and more recycled paper pulp Large players in the market are now making investments based on expected new RCP policies Import permits for the big three Chinese containerboard producers is 11.3 million tonnes in 2018 Total RCP use by the current three largest Chinese PMs estimated at 26.3 million tonnes 10
What Investments Are Being Made? Nine Dragons (2018: 15.1 million tonnes of PPB capacity in China, 14.8 million tonnes RCP consumed, 6.1 million tonnes RCP permits) Biron, Wisconsin: convert PM25 to containerboard and build two recycled pulp lines with 650,000 tonnes per year of capacity in fourth quarter 2019 or first quarter 2020 Rumford, Maine: add 410,000 tonne per year air dried pulp machine Old Town Pulp Mill, Maine: convert PM to 275,000 tonnes of UKP to start first quarter 2019 Fairmont, West Virginia: Acquiring 218,000 tonne per year recycled pulp mill from Resolute Vietnam: greenfield mill in Haiphong with 1.2 tonnes of containerboard/boxboard capacity; possible start up in late 2019 (?), still needs environmental permits 11
What Investments Are Being Made? Lee & Man (2018: 6.8 million tonnes PPB capacity in China, 6.8 million tonnes RCP consumed, 2.7 million tonnes RCP permits) Vietnam: 500,000 tonne per year recycled containerboard machine at existing mill to start in 2019 Shanying International (2018: 4.1 million tonnes PPB capacity, 4.7 million tonnes RCP consumed, 2.5 million tonnes RCP permits) Wycliffe, Kentucky: Acquired idled Verso mill with 254,000 tonnes per year of coated paper and 30,000 tonnes per year of air dried pulp Sun Paper (2018: 5.6 million tonnes PPB capacity, just 800,000 tonnes of containerboard, 952,000 tonnes of RCP consumed, 0 permits) Laos: 800,000 tonnes per year of recycled containerboard (machines ordered) and 400,000 tonnes per year of recycled pulp at its existing mill Arkansas?: Ongoing discussion of construction of kraftliner mill 12
What Happens to Capacity in China? List of new projects in China remains long in spite of current and potential future fiber shortages There were 19 projects in 2017 with 4.3 million tonnes of capacity We show 28 projects with 8.6 million tonnes of capacity in 2018 There are an additional 16 projects announced for 2019 with 6.9 million tonnes of capacity Lots of potential for closure or supply disruption Required conversion from coal to natural gas for mills in Dongguan Current information suggests plans are in place to address this without disrupting operations Fiber constraints and higher costs due to changes in RCP policies Margins at Chinese containerboard mills have declined in recent months 13
Chinese Capacity Rising, But How Much Closure/Delay? Change in Million Tonnes 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2.0 4.0 Demand Tracked Growth 5.2 Capacity Operating Rate 3.4 1.0 0.9 6.7 2013 2014 2015 2016 2017 2018 2019 2020 95% 90% 85% 80% 75% 70% 65% 60% 55% 14
Fiber Constraints Drive Up Chinese Net Imports Year to Year Change 5 4 3 95% 90% Where will the imports come from? Concerns for the forecast Million Tonnes 2 1 0 1 2 3 4 2007 Net Imports Demand 2008 2009 2010 2011 Production Operating Rate 2012 2013 2014 2015 2016 2017 2018 2019 2020 85% 80% 75% 70% 65% Will demand growth be even weaker? Strength of China s economy? Will fiber shortages and price levels cause more use reduction? Will imports really grow that much? 15
In Asia (Excl. China), Demand Growth Fairly Steady in 2018 2020 Million Tonnes 40 35 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 South Korea, Taiwan and Hong Kong Japan Southeast Asia India Other Total Percentage Change 2019 2020 Southeast Asia includes Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. 8% 7% 6% 5% 4% 3% 2% 1% 0% Growth supported by continued strength in the global economy Supports export oriented economies Better conditions in India Annual gain averages 3.3% or 1.1 million tonnes Risks More pronounced slowing in China Global trade wars 16
Operating Rates in Asia (Excl. China) Rising as Both Demand and Exports Grow Change in Million Tonnes 2.5 2.0 1.5 1.0 0.5 0.0 0.5 Demand Capacity Net Exports Operating Rate 2013 2014 2015 2016 2017 2018 2019 2020 94% 92% 90% 88% 86% 84% 82% 80% 17
What We Need to Watch What policies are pursued by the Chinese government? Ban on solid waste imports including all recycled paper? Other environmental polices such as requiring reductions in coal use? Policies on eco packaging and whether they encourage paper or plastics? E commerce in China How rapidly will it grow? What steps will the industry take to reduce its packaging footprint? What policies are being pursued by other Asian countries? RCP controls/bans? Paper versus plastic? 18
Thank you! For more information: World Containerboard 5 Year Forecast www.risi.com/forecasts Asian Paper Packaging 5 and 15 Year Forecasts www.risi.com/forecasts Asian Pulp and Paper Monitor www.risi.com/appm 19